It must be said that the root of all trading is being aware of the market sentiment, which guides the future direction of prices. Regardless of where you think prices “should” go based on any available research, they will only go there if the market in general, i.e. most of the individual traders, decide to take them there by their buying and selling actions. When you’re trying to identify opportunities, in the simplest form you are trying to figure out what other market participants are going to do to affect the prices.
You can get a good sense of the overall market sentiment from online resources. Each week Barron’s publishes a set of numbers called Investor Sentiment Readings, and this includes the current sentiment and that of the previous two weeks. To get to it you go to www.barrons.com, scroll down and click on Market Lab, and there you will find a great deal of financial information, including the ISR. Often the sentiment will be in the middle of the range, but if you see it going to extremes you may want to prepare for a contrarian stance. If the sentiment is too bullish, that may herald a bear market, and vice versa.
There is another highly respected sentiment service on the Internet, and this is from Investors Intelligence, at www.investorsintelligence.com. They survey over 120 different investment newsletters and report their findings on the sentiments expressed. Once again, you may wish to use this information to take a contrarian stance. When the bullish readings are more than 55%, then there is frequently too much optimism in the market, and you may find it is time for a bearish correction. Bullish readings below 35% quite often presage a positive market.
This service has been going since 1963, and you can even obtain historical data if you wish. This is however a paid subscription service and the weekly sentiment poll costs an annual £132 at the time of writing.
